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Coastal Financial Corporation margin expansion and loan growth (Nasdaq: CCB) is likely to slow in 2023 compared to last year. Despite this, top-line growth remains positive, Conclusion. Overall, Coastal Financial Corporation expects he will report earnings of $4.21 per share in 2023, up 40% year-over-year. The year-end price target suggests a moderately high upside from current market prices. Therefore, we have assigned a Buy rating to Coastal Financial Corporation.
Losing momentum due to large margin expansion
Coastal Financial’s net interest margin surged 38 basis points in the fourth quarter of 2022 after further impressive growth of 92 basis points in the third quarter and 121 basis points in the second quarter.Margins cannot be expected to continue expanding At the same pace in the future due to changes in balance sheet positioning.
Coastal Financial Corporation’s deposit mix has deteriorated significantly over the past 12 months. As noted in the earnings release, interest-free deposits plummeted from 57.4% at the end of December 2021 to 27.5% of total deposits by the end of December 2022. At the same time, NOW and money market account balances surged. Rates on these accounts fluctuate regularly, making the average deposit cost highly sensitive to changes in market interest rates.
In addition, Coastal Financial issued a total of $20 million in subordinated debt in November 2022. This will be a variable rate loan, with a fixed rate of 7% for his first five years, as mentioned in the press release. By my calculations, this issuance could increase the average funding cost by 5 basis points. The full quarterly impact of this issuance will be seen in the first quarter of 2023.
On the plus side, the loan mix has improved significantly. As of the end of December 2022, approximately 56% of its assets had repriced within his three months, up from his 36% of assets at the end of December 2021, as said in the earnings call.
As of September 2022, the topline was highly rate sensitive. The results of management’s interest rate sensitivity analysis presented in the third quarter 10-Q filing show that a 200 basis point increase in interest rates would result in a 12-month period (4th quarter 10-Q filing not yet released). ).
Taking these factors into account, we expect margins to increase by 20 basis points in 2023.
Loan growth slows, but remains in double digits
Coastal Financial Corporation’s loan growth slowed in the fourth quarter after an impressive first nine months of the year. The portfolio grew his 4% during the quarter, bringing the full year growth to his 49%. Loan growth is most likely to slow further in the coming quarters due to economic factors undermining growth in almost all loan segments. Official sources say Coastal Financial operates primarily in Washington state, which currently has a higher unemployment rate than most other states. In addition, the company mainly lends to small and medium enterprises. Therefore, the PMI index is another good indicator of product demand. As you can see below, his PMI index for services and manufacturing are both currently below 50, indicating a contracting economy.
The company also has some exposure to the mortgage market. As of the end of December 2022, mortgages accounted for his 17% of total loans. The outlook for this segment remains bleak due to the highest mortgage rates in a decade. Additionally, US home sales have trended downward since last year, as shown below.
Given these factors, we expect loan growth in 2023 to be below historical averages. Nevertheless, we expect growth to continue, driven by growth momentum and a strong regional job market in the past (see below). Double-digit. Overall, the loan portfolio he expects to grow by 10% in 2023.
Meanwhile, the outlook for deposits looks bright, thanks in part to the Banking as a Service (“BaaS”) segment. Coastal Financial had six partners in its pipeline as of the end of December 2022, in addition to 19 active partners. As of the end of December 2022, BaaS deposits accounted for just 3.6% of total deposits. New partnerships could significantly increase the proportion of deposit book segments.
The following table shows my balance sheet estimates.
| financial position | FY18 | FY19 | 2020 | 21st year | 22nd year | FY23E |
| net loan | 758 | 928 | 1,528 | 1,714 | 2,553 | 2,818 |
| net lending growth | 16.9% | 22.3% | 64.7% | 12.2% | 49.0% | 10.4% |
| Other earning assets | 151 | 148 | 173 | 844 | 418 | 431 |
| deposit | 804 | 968 | 1,421 | 2,364 | 2,818 | 3,110 |
| Borrowings and Subdebt | 34 | 32 | 200 | 59 | 53 | 54 |
| common stock | 109 | 124 | 140 | 201 | 243 | 300 |
| Book value per share ($) | 10.3 | 10.2 | 11.5 | 16.1 | 18.0 | 22.2 |
| Tangible BVPS ($) | 10.3 | 10.2 | 11.5 | 16.1 | 18.0 | 22.2 |
| Source: SEC filings, authors’ estimates (in millions of US dollars unless otherwise specified) | ||||||
Revenue expected to surge 40%
Slower loan growth and higher margins should boost earnings this year. Additionally, with his six new BaaS partnerships going forward, non-interest income will likely continue to trend upwards throughout the year. On the other hand, provisions for expected credit losses are likely to remain high, limiting revenue growth. Like 2022, 2023 provisioning could be above historical averages due to growth in his BaaS segment, which is generally riskier. From 2017, he expects provisioning costs to account for his 2.8% of total loans in 2023, compared to an average of 0.35% through 2021.
Overall, we expect Coastal Financial to post 2023 earnings of $4.21 per share, up 40% year over year. The following table shows my income statement estimates.
| Profit and loss statement | FY18 | FY19 | 2020 | 21st year | 22nd year | FY23E |
| net interest income | 35 | 42 | 57 | 79 | 172 | 227 |
| Bad debt allowance | 2 | 3 | 8 | Ten | 79 | 80 |
| non-interest income | Five | 8 | 8 | 28 | 125 | 173 |
| non-interest expenses | 26 | 31 | 38 | 63 | 167 | 248 |
| Net profit – Ordinary Sh. | Ten | 13 | 15 | 27 | 41 | 57 |
| EPS – diluted ($) | 0.91 | 1.08 | 1.24 | 2.16 | 3.01 | 4.21 |
| Source: SEC Filings, Earnings Releases, Author’s Estimates (in millions of US dollars unless otherwise specified) | ||||||
My estimates are based on certain macroeconomic assumptions that may not materialize. Therefore, your actual earnings may differ significantly from my estimates.
Adoption of purchase evaluation
I value Coastal Financial Corporation using historical price-to-tangible asset book (“P/TB”) and price-to-earnings (“P/E”) multiples. The stock has historically traded at an average P/TB ratio of 1.76, as shown below.
| FY18 | FY19 | 2020 | 21st year | 22nd year | average | |
| T. Book value per share ($) | 10.3 | 10.2 | 11.5 | 16.1 | 18.0 | |
| Average Market Price ($) | 15.9 | 15.9 | 15.1 | 31.3 | 43.9 | |
| Past P/TB | 1.55 times | 1.56 times | 1.31 times | 1.95 times | 2.43 times | 1.76 times |
| Source: Company Finance, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/TB multiple by the projected tangible book value of $22.2 per share yields a target price of $39.1 at the end of 2023. This target price represents an 11.7% drop from the January 27 closing price. The following table shows the target price sensitivity to the P/TB ratio.
| P/TB multiple | 1.56 times | 1.66 times | 1.76 times | 1.86 times | 1.96 times |
| TBVPS – December 2023 ($) | 22.2 | 22.2 | 22.2 | 22.2 | 22.2 |
| Target price ($) | 34.7 | 36.9 | 39.1 | 41.3 | 43.6 |
| Market price ($) | 44.3 | 44.3 | 44.3 | 44.3 | 44.3 |
| Upside/(Downside) | (21.7)% | (16.7)% | (11.7)% | (6.7)% | (1.6)% |
| Source: Author’s estimate |
As you can see below, the stock has historically traded at an average P/E of around 14.7x.
| FY18 | FY19 | 2020 | 21st year | 22nd year | average | |
| Earnings Per Share ($) | 0.91 | 1.08 | 1.24 | 2.16 | 3.01 | |
| Average Market Price ($) | 15.9 | 15.9 | 15.1 | 31.3 | 43.9 | |
| Past PER | 17.4 times | 14.6 times | 12.2 times | 14.5 times | 14.6 times | 14.7 times |
| Source: Company Finance, Yahoo Finance, Author’s Estimates | ||||||
Multiplying the average P/E multiple by the earnings per share forecast of $4.21 yields a target price of $61.7 at the end of 2023. This target price represents a 39.3% increase from the January 27 closing price. The following table shows the sensitivity of the target price to the P/E ratio.
| PER Multiple | 12.7 times | 13.7 times | 14.7 times | 15.7 times | 16.7 times |
| EPS 2023 ($) | 4.21 | 4.21 | 4.21 | 4.21 | 4.21 |
| Target price ($) | 53.3 | 57.5 | 61.7 | 65.9 | 70.1 |
| Market price ($) | 44.3 | 44.3 | 44.3 | 44.3 | 44.3 |
| Upside/(Downside) | 20.3% | 29.8% | 39.3% | 48.8% | 58.3% |
| Source: Author’s estimate |
Equally weighting the target prices from the two valuation methods yields a total Target price $50.4, which represents a 13.8% increase from the current market price. Therefore, we have assigned a Buy rating to Coastal Financial Corporation.
